Political economy of finance in Europe: Week 1
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
The economics textbook view
“A vast expansion in world trade had brought all manner of new goods into international commerce … The New World’s abundant land, embodied in its agricultural exports, flooded into Europe, and European manufactures were traded back in exchange. … peripheral trading nations lined up to provide the necessary nitrates, bauxite, rubber, coal, and oil. In labor markets too, there was a freedom simply unimaginable today. … Labor, whether skilled or unskilled, could, in principle, wander around the world seeking out the best returns or the most desirable location, unhindered by quotas, immigration inspectors, and the like.” (Obstfeld and Taylor 2005)
The economics textbook view
“The first phase lasted from 1870 to the First World War. During this time, rich countries constantly exported between 1–2% of their aggregate GDP to the rest of the world. Over time, it added up to a significant resource transfer from rich to poor. … In the capital market before 1914, the world’s poor were indeed the world’s borrowers and the rich countries the world’s bankers.” (Schularick 2016)
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
1500 – early 19th century: Military, expeditionary colonialism, based on conquest and slavery
Main function of finance: Financing of “trading” expeditions and other colonial enterprises
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
1500 – early 19th century: Military, expeditionary colonialism, based on conquest and slavery
Main function of finance: Financing of “trading” expeditions and other colonial enterprises
Early 19th century – 1960: Still very violent, but European rule territorilized and economic relations institutionalized
Main function of finance: Investment of metropolitan wealth in shares and bonds issued by governments and companies in the periphery
“the endeavor of the great controllers of industry to broaden the channel for the flow of their surplus wealth by seeking foreign markets and foreign investments to take off the goods and capital they cannot sell or use at home” (Hobson 2011)
Hauner, Milanovic, and Naidu (2017) set out to test the Hobson-Lenin-Luxemburg thesis using historical data on investment returns. Results:
“The rich tended to invest overwhelmingly in foreign assets because they were, adjusted for risk, more profitable than available domestic opportunities.”
“To protect such foreign assets, whether portfolio or direct, the countries, partially at the instigation of investors in foreign assets, increased military investments.”
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
Fiscal shocks and state building (Queralt 2022)
“Extreme conditionality”
“the hypothecation of local assets (e.g., state monopolies, railroads, and customs houses) for fresh foreign loans” (Queralt 2022, 3)
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
Based on ‘poor’ countries’ negative current account balance—see Figure 1—during the 1870-1914 period, economists speak of “a significant resource transfer from rich to poor” (Schularick 2016).
However, this interpretation ignores financial transfers from poor to rich (in balance of payments terminology: ‘primary income’; more in week 3)
“a fact that may not be sufficiently well known, although it is well attested by trade statistics from the era and was well known to contemporaries. In the period 1880–1914, the United Kingdom and France earned so much from their investments in the rest of the world (roughly 5 percent additional national income for France and more than 8 percent for the United Kingdom) that they could allow themselves to run persistent structural trade deficits (an average of 1–2 percent of national income for both countries) while continuing to accumulate claims on the rest of the world at an accelerated pace.” (Piketty 2020, 283)
“In other words, the rest of the world labored to increase the consumption and standard of living of the colonial powers, even as it became increasingly indebted to those powers.” (Piketty 2020, 283)
The political economy view
Creating, trading, and enforcing financial claims
… by specific actors: states, firms, individuals
… connected via relationships of hierarchy and power
We study these relationships through the lens of
Agenda
What is global finance?
Two periods of European colonialism
Old colonialism
New imperialism
Sovereign debt in the 19th century
What is global finance, really?
Outlook
LSE | EU469 | Week 1